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TMI Blog2011 (2) TMI 1419X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of interest of ₹ 63,03,433/- without appreciating the fact that the immediate source of investment are borrowed funds and balance sheet position is deceptive in this regard. Grounds of appeal of assessee are as follows: 1. The CIT(A) erred in upholding the disallowance of interest of ₹ 21,79,536/- made by AO on investment in shares of ₹ 23,42,55,539/- out of business income without appreciating the fact that the appellant had surplus interest free funds available with it and hence no interest is attributable towards investment in shares. 2. The CIT(A) erred in not considering the additional ground raised by the appellant without assigning any reasons. The additional ground raised was as under:- The AO erred in disallowing the claim of differed tax liability of ₹ 2,51,74,574/- while computing book profit u/s. 115JB ignoring the fact that the company was compulsorily required to provide for deferred tax liability as per Accounting Standard 22. The AO further made addition in respect of Wealth-tax provision of ₹ 28,282/- even though as per provisions of section 115JB adjustment is can be made only in respect of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer was deleted by the CIT(A) as well as the ITAT. According to the Assessing Officer the revenue has gone in further appeal and, therefore, disallowance of interest has to be made. Accordingly the Assessing Officer disallowed interest expenses of ₹ 10,91,194/-. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer by observing that the addition has been made by Assessing Officer by following the orders of assessment in assessee s own case for the earlier years. He found that there was no change in the facts as it prevailed in the earlier years and the present assessment year. Since the issue was already decided in favour of the assessee by ITAT in the earlier assessment years, the CIT(A) deleted the addition made by Assessing Officer. 5. Against the order of the CIT(A) the revenue has preferred ground No.(a) before the Tribunal. 6. The Assessing Officer also noticed that the assessee had invested a sum of ₹ 39,19,47,398/- in the shares of various companies quoted and unquoted. On these shares dividend of ₹ 67,389/- was received and offered to tax under the head income from other sources. The Assessing Officer noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to investment in shares as worked out by the Assessee worked out to ₹ 57,44,412/-. The working so submitted was without prejudice to Assessee s stand that no portion of interest needs to be disallowed. The assessee vide its letter dated 10/2/2006 submitted another working giving proportionate interest calculation relatable to investment in shares at ₹ 84,82,979/-. The AO found this calculation by the Assessee to be in line with the method adopted in the assessment in the earlier year. 7. The AO however held that interest of ₹ 84,82,979/- cannot be allowed as deduction under section 36(1)(iii) of the Act and added the same to the business income of the Assessee. The AO however, accepted the alternative plea by the assessee, to treat the interest expense of ₹ 84,82,979/- as expenditure incurred in earning dividend u/s.57 of the Act. 8. Before CIT(A) the assessee submitted that it was engaged in the business of running hotels and real estate development. It has made investments in shares of other group companies which were held as investment. These investments existed and are being made every year right from assessment year 1990-91 onwards. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of ₹ 23,42,55,539/-. As against this, the interest free fund available is only ₹ 33,90,26,543/-. As such, the argument on the basis of which the Assessee was given relief by the ITAT in 1996-97 and by the very same CIT(A) in the assessment year 2002-03 that the interest free fund is many times more than the investment does not hold good during the year. The CIT(A) held that it was a settled proposition of law that for claiming deduction u/s. 36(1)(iii), the onus is on the Assessee to prove that funds borrowed has been used for the purpose of business. He held that the Assessee in this Assessment year has not been able to establish that no amount of borrowed fund has been used for making investment in shares. Therefore, the presumption of the AO that borrowed funds have been used for making investment in shares is not unfounded. In the circumstances, the addition made by the AO was upheld in principle. However, the CIT(A) found that the AO has made the disallowance both in respect of investment made in earlier years as well as investment made during the year. As investment made in earlier years has already been held to be out of own/interest free funds, no disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and break up of investment in shares. A.Y Interest Bearing Funds Non interest bearing funds Investment in shares 1990-91 2,43,04,000 2,35,09,207 66,67,775 1991-92 4,51,66,257 14,52,02,720 4,46,77,077 1992-93 1,54,87,948 6,66,65,522 1,19,24,744 1993-94 1,16,18,064 14,50,39,965 1,29,49,205 1994-95 12,06,57,613 19,58,41,249 1,69,74,762 1995-96 11,82,85,718 28,78,99,129 97,44,066 1996-97 5,64,66,568 24,31,86,629 11,22,302 The perusal of orders relating to assessment year 1991-92 to 1994-95 reveal that no part of interest expenses claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in shares progressively made by the assessee company from year to year cumulating in total investment in shares as on 313/1996 at ₹ 5,87,43,389/-. In addition the assessee has also made interest free advances in earlier years amounting to ₹ 1,64,04,000/-, which are same as on 31/3/1996. The assessee had borrowed capital of ₹ 18,02,73,200/- as on 31/3/1996 on which interest is being paid by it. In addition the assessee company had the under mentioned total non interest bearing funds available as on 31/3/1996. Capital Reserve 2,20,12,543/- Current liabilities 11,42,81,058/- Collection from flat holders 92,99,69,275/- Option money advances (free of interest) 8,05,28,500/- The amounts received during year on account of above mentioned heads are as under:- Capital Reserve 58,35,997/- Current Liabilities 4,35,57,264/- Collection from flat holders 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) for sustaining interest disallowance in part was that the interest free funds in the earlier assessment years was substantial, whereas in the present assessment year they were not substantial. In this regard ld. Counsel for the assessee had submitted before us that the moment it is found that there are sufficient interest free funds available for making investment in shares no disallowance of interest on borrowed funds could be made and in this regard relied on the decision of the Hon ble Bombay High Court in the case of Reliance Utilities Power Ltd., 313 ITR 340(Bom). In this decision the Hon ble Bombay High Court has held as follows: .. if there were funds available both interest free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. 15. The ld. D.R however submitted that the finding of the CIT(A) according to him are correct. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r known as M/s. Paramount Hotels Ltd.) vide order dated 29/12/2005 had considered the availability of interest free funds and the interest bearing funds and the deployment of the said funds in interest free advances and others. The matter was deliberated upon at length and it was found that the assessee had sufficient non-interest bearing funds to make non interest bearing advances. It was also held by the Tribunal that no disallowance of interest on account of investment in shares in the companies was made in the earlier years. Accordingly, no disallowance out of interest was warranted in the present year. The ratio laid down by the Tribunal in Assessment Year 1996-97 was consistently being followed in the years thereafter and relief is allowed to the assessee in consistence with the earlier orders of the Tribunal in assessee s own case (viz. M/s. Paramount Hotels Ltd. which is now been called as M/s. Raheja Corporation Pvt. Ltd.). In view of the fact that the advances are brought forward from the earlier years wherein no disallowance out of interest was made, there is no merit in disallowing any part of interest expenditure. We therefore confirm the order of CIT(A) in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd) 1. 03/04/2003 39447 62950 2. 10/05/2003 1039447 3349290 3. 01/06/2003 1949557 48007001 4. 05/08/2003 3949447 243321425 5. 27/10/2003 4199447 243321425 6. 27/10/2003 5149447 243321425 7. 16/01/2004 5149447 1014802995 8. 16/01/2004 5249447 1014802995 9. 12/02/2004 5249697 326463050 10. 12/02/2004 5249947 326463050 11. 26/03/2004 47803072 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has already been held that no disallowance is called for in respect of investment made up to assessment year 2002-03 and in respect of investments made during the year, the addition of ₹ 95,61,006/- is restricted to ₹ 45,29,625/- and the appellant gets relief of ₹ 50,31,741/- which is in respect of addition upto assessment year 2002-03 and addition made during the year. The AO is further directed to verify the calculation of interest which has been filed in course of appeal and suitably modify the quantum of relief in terms of the direction given above if the calculation furnished by the appellant is found to be not correct. 22. It can be seen that the disallowance of interest expenses sustained by the CIT(A) is in relation to A.Y.2003-04. Otherwise the disallowance of interest has been deleted by the CIT(A) on the finding that there were enough interest free funds available with the assessee. While deciding the issue in A.Y 2003-04 we have already held that in respect of the investment made in the previous year relevant to A.Y.2003-04, there was enough interest free funds and, therefore, disallowance of proportionate interest pertaining to investment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) and upheld the order of the CIT(A) deleting the disallowance made by the Assessing Officer. For the reasons stated therein we allow the appeal of the assessee and dismiss the appeal by the revenue. ITA NO.1831/MUM/2010 ITA NO.1006/MUM/2010: 26. ITA No.1631/M/2010 is an appeal by the revenue while ITA No.1006/M/2010 is an appeal by the assessee. Both these appeals are directed against the order dated 8/12/2009 of CIT(A) -40 Mumbai relating to assessment year 2006-07. The grounds of appeal of the revenue read as follows: (a) On the facts and circumstances of the case and in law, the ld. CIT(A) erred in holding that during the year the assessee had sufficient funds for making investments and the disallowance of expenditure u/s. 14A is to be restricted to the investments made by the assessee during the assessment year 2003-04 only. (b) On the facts and circumstances of the case and in law, the ld. CIT(A) erred in not applying the provisions of section 14A r.w. rule 8D applicable to the facts of the case. The grounds of appeal of the assessee reads as under: The CIT(A) erred in upholding the disallowance of interest of ₹ 87,74,707/- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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